Gladstone Capital Downgrade Comes As No Surprise

• Gladstone Capital Corporation GLAD shares have appreciated 8.49 percent year-to-date after touching a low of $7.33 on January 29.
• Cantor Fitzgerald’s David J. Chiaverini downgraded the rating for the company from Buy to Hold, while reducing the price target from $9.50 to $9.00.
• BDC portfolio companies that have exposure to oil and gas may face valuation write-downs in the coming quarters, Chiaverini said.

Analyst David Chiaverini mentioned that Gladstone Capital has a high level of oil and gas exposure of 15.4 percent, as compared to the peer group average of 5.9 percent. “We fear that BDC portfolio companies exposed to oil and gas may face valuation write-downs in coming quarters given the still-low price of oil despite last week’s bounce-off the lows.”

“Gladstone Capital’s credit quality weakened modestly in the most recent quarter with its non-performing loan ratio increasing to 3.5% on a fair value basis and 13.4% on a cost basis up from 2.8% and 10.2%, respectively,” Chiaverini wrote. These compare poorly with the peer metrics of 0.3 percent and 1 percent, respectively.

While highlighting that Gladstone Capital’s credit problems are predominantly due to legacy investments that originated prior to 2008, the analyst said that the disposition of these assets will help the company resolve its credit issues and position it on the growth path.

Chiaverini believes that Gladstone Capital’s current dividend level is sustainable in view of the “explicit support from its external advisor, which has committed to waive advisory fees indefinitely.”